The gold bulls are in firm control as prices are poised to extend the recent rally. The gold market has seemingly hit its stride even as stocks continue their rally into fresh all-time highs. The notion of gold rising along with stocks, while not extremely unusual, does beg some questions. Notably, what might be driving some degree of risk aversion that is clearly in the marketplace.
Investors are thus far giving the Trump administration the benefit of the doubt, although at some point the stock bulls’ resolve may be tested. The idea of significant tax reforms expected in the near future along with a massive fiscal spending plan (also expected in the near future) has kept risk appetite on the high side. Those plans have thus far, however, been very lacking in pertinent details.
Investor patience on these fronts may eventually become stretched given many of the potentially negative headlines surrounding the new administration. In fact, geopolitical risks would seem to be the primary driver behind gold’s recent upside.
The Fed is also doing a good job keeping investors guessing on the interest rate front. Recent data has pointed to increasing inflationary pressures and ongoing improvement in the economy. Fed Chairwoman Janet Yellen has, however, not committed to any specific timeline for hiking rates further. Recent data along with some hawkish commentary from various Fed officials has raised the prospects for a March hike, although June still seems to be the most likely target for the next hike from the central bank.
The Fed also seems reluctant to begin tightening too fast too soon given the unknowns surrounding Trump administration policies. It is entirely possible that the central bank would prefer to hold off on further tightening until it has more details about Trump’s fiscal spending plans and their potential economic impact.
Over the next couple weeks, the February jobs report is likely the most significant piece of economic data set for release. Whether or not a very strong jobs report is enough to motivate the Fed to act in March is unclear.
Investors may also pay particular attention to bonds and notes in the coming weeks. Interest rates have thus far not been able to move beyond the post-Trump election victory highs, and have actually been declining again in recent trade. This is another mixed signal that investors have to contend with. Further strength in the sector may also be indicative of increasing risk aversion. Bonds and stocks are not likely to rise together for very long, and at some point something will have to give.
If the equity market begins to show signs of topping out, it could give gold investors yet another reason to keep buying and keep the rally going. A sizable reversal in stocks could also send fresh capital flows into gold and alternative asset classes.
Until more clarity is seen on numerous issues including the Trump administration’s plans and the Fed’s trajectory on rates, the path of least resistance in gold is likely to remain higher and any significant dips in gold may be aggressively bought.